Investors warn that dollar faces euro threat 11-10-98

SuzanneMiller

} Survey of European money managers Investors see euro-threat to dollar By Suzanne Miller, CBS MarketWatch Last Update:

LONDON (CBS.MW) -- The dollar has been the world's unrivaled currency of choice since World War II. It's the currency investors have always run to when times got tough overseas.

A survey published Tuesday by Deutsche Bank, Germany's biggest bank, shows global fund managers with $7.5 trillion in assets under management now believe the euro is going to give the dollar -- literally -- a run for its money.

Visit any number of countries in the former Soviet Union, and you'll find vendors begging to be paid in the greenback. It's easy to understand why. The U.S. has been home to the world's richest, reliable, and most powerful economy for decades. But times may be changing.

The euro, the mythic currency that will unite 11 European countries (Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, The Netherlands, Portugal, and Spain) -- is now just 52 days away from becoming a hard-currency reality.

Not so long ago, many economists and fund managers believed the euro would be the weaker currency. But as Europe's core economies have tackled their fiscal and employment problems and marched down the corporate restructuring route, few now doubt the potential of the euro.

In the German bank's survey, two-thirds of Deutsche's largest institutional clients in Europe, North America, and Asia said the Euro will ultimately rival the dollar as the global issuance currency of choice. (For a different viewpoint, see StockWatch.)

Euroland's trade surplus

The euro's strength will hang on a couple of key points -- one of the more important being that Euroland will run an estimated trade surplus of $100 billion, or 1.5 percent of the eurozone's gross domestic product while the U.S. is expected to record a trade deficit of about $140 billion in 1998.

Some see a massive shift from dollar assets into Euro assets. Fred Bergsten, director of the Institute for International Economics, has predicted there will be a shift of some $500 billion to $1 trillion into the euro. The Deutsche report also predicts that the euro will be gain ground as a favored reserve currency by 2003 -- the first serious dollar challenger since World War II.

There is also vast scope for increasing the depth, breadth and liquidity of the euro financial market. Deutsche pointed out that the G-10 members of the European Union account for around one-third of G-10 output, and yet the share of G-10 financial assets denominated in euros will only be around 1/8. Deutsche figures that Euro-denominated assets will have to increase some $700 billion in order to make up for that imbalance.

There's some good news, though, for those who are loathe to part just yet with their coveted greenbacks. The report suggests that it could take longer than many expected to develop a U.S.-style corporate bond market in Europe, because many European investors aren't able to buy debt below single A by the major rating agencies.

So while the euro is zooming up to the start date, the impact -- however vast -- may take a few years to make itself felt. For dollar aficionados, that means there's still time to soak up the greenback limelight.

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